AM Best has affirmed the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Rating of “aa-” (Superior) of Construction Guarantee Cooperative (CG) (South Korea). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect CG’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management (ERM).
CG’s risk-adjusted capitalisation is assessed at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), underpinned by its large absolute capital base of KRW 6.5 trillion (USD 5.9 billion) as of the end of 2020, extremely low net underwriting leverage and very favourable liquidity position. The company’s conservative investment portfolio is focused on liquidity for payment of surety bond claims and providing loans to its members as a cooperative and helps maintain the stability of its robust risk-adjusted capital position.
CG’s strong operating performance is supported by its highly profitable surety underwriting performance and steady investment income, as demonstrated by a five-year average combined ratio of 54.2% (2016-2020) and an operating ratio of -3.4%, albeit volatile year-by-year. Its surety underwriting results have not been significantly impacted by the COVID-19 pandemic due to stable and increasing levels of new public sector construction and a continuously favourable private housing market in South Korea. In 2020, profitability of its surety line further improved, coupled with favourable claims experience, which led to a reversal on its provisions for surety claims.
CG’s strong price negotiating power arising from its dominant market share and the compulsory nature of surety bonds in construction projects partially offset the underwriting volatility caused by the high correlation between its operating performance and the construction industry. Meanwhile, CG’s insurance business, which comprised 17% of its gross written premium (GWP), incurred a very small net loss in 2020, mainly attributable to increased severe weather related claims during the year. While the impact on CG’s bottom line was minimal, AM Best notes that the company implemented mitigation measures to ensure its steady performance, such as rate increases and tighter underwriting. A solid stream of investment income provides additional stability to CG’s overall bottom line.
Established in 1963 under the Korea Construction Financial Cooperative Law, CG is 100% owned by its members, which comprise the majority of South Korea’s general construction companies. As a government-designated surety writer for general contractors, CG has an established presence in South Korea’s construction surety segment with the largest market share of over 50% based on total underwriting volume in 2020. In terms of just the general contractors segment, CG accounted for a 75% share in 2020. To alleviate its concentration risk within the domestic construction surety line, the company has been diversifying its business by expanding into overseas construction bonds and construction-related insurance business; these accounted for about 7% and 17% of total GWP in 2020, respectively.
AM Best views CG’s risk management capabilities as being aligned with its risk profile. Its key risk areas are monitored effectively through a comprehensive ERM structure, which includes a sophisticated credit evaluation system and real-time monitoring of its members’ financial conditions.
Negative rating actions could occur if CG’s operating performance deteriorates markedly due to significant accumulation of surety bond claims from a prolonged downturn in the overall economy and construction industry.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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